How does the RSI indicator work in cryptocurrency trading?

Bitsgap

·

2019-01-04

As a cryptocurrency trader, it’s important to use every advantage in order to make a profit. That’s why it’s important to learn how to use at least the most popular techniques and indicators for crypto trading in order to give yourself an edge.

In this article, we’ll be talking about the RSI indicator. This is a very useful trading signal which can help you to make better trades, and you should learn to use it effectively. What is it though and how does it work? Keep reading to get the answers you need to use the RSI indicator.

What is RSI indicator in cryptocurrency trading

RSI stands for Relative Strength Index. This interesting indicator measures how great recent price changes are in the market. Using this data, the indicator can then help you to understand whether the current market is overbought or oversold. Obviously, this makes it extremely useful in learning when you should buy and when you should sell.

Of course, while this all sounds pretty easy, the reality of using it is a little different. Like everything else in life, you’ll need to acquire some experience and skill to use it effectively.

How does it work?

RSI works on a mathematical equation using the average gain or loss incurred during a specified period of time. Most trading tools which support RSI indicators should have an area that gives you the number value of that particular asset for the current RSI.

If that number of above 70, then there’s a strong indication that the crypto coin or token that you are trying to trade is currently overbought. This means that the coin or token is likely trading at an inflated price and you should avoid buying in here.

If you already have the coin or token in your portfolio, then it might be a good time to sell as it’s likely that the price will drop soon to correct this. The market will not sustain inflated prices forever.

If the RSI reads that your asset is sitting at 30 or less, then it is oversold. That means that the market is indicating to you that it’s a good time to buy more of whatever coin or token that you’re looking at.

RSI indicator example

Jimmy has had his eye on a particular cryptocurrency asset for some time, but he has hesitated to buy in due to the price. He has been regularly checking the RSI for this asset, and it is clearly overbought, leading to an inflated price. He decides to keep watching and waiting, hoping to pick it up later.

Soon, the price of the asset begins to decline, just as he suspected. However, he’s not sure if the coin or token is finished dumping yet, so he waits a little longer, continuing to check the RSI. As the RSI begins to fall, he notices it dipping below 30, and decides that it’s time for him to make his move.

He holds on to his new cryptocurrency, and within a few months, the price has returned to a level that is supported by the market. Jimmy has already made a profit on his investment just by knowing which assets are over or undervalued thanks to RSI.

When and how to use RSI in crypto?

You should use the RSI indicator to figure out when to buy or sell your cryptocurrencies. This index is basically telling you which assets are trading below or above what they should. That’s powerful information to know, and it can be very profitable for you if you learn to use it right.

If you see a coin or token you’re interested in is trading below 30, then it’s time to begin accumulating for the next run. You can easily use this technique to make a nice profit when it returns to a more reasonable value.

How RSI is calculated?

RSI is calculated using a mathematical equation that compares the average gain and loss over a specified period of time. The standard for this is to use 14 periods as a baseline for determining an asset’s true value.

The result of this is a number scale which indicates the value of a coin or token. Above 70 is overbought and an asset below 30 is oversold, allowing investors to see which coins or tokens are worth their time to trade.

Fortunately, you don’t really need to know exactly how this works to use it. Most good trading platforms will have an RSI indicator already calculated for you, and you can just use the number scale to take advantage of RSI calculations for your trade.

It’s a great way to confirm your suspicions that you’re making a great buy or perhaps be given the chance to rethink your strategy.

How reliable is RSI indicator

Many crypto traders love the RSI indicator because of its simplicity and reliability. Investors should keep in mind that all indicators are based on past market data. Many of them, while useful, can’t account for unusual market activity, and in cryptocurrency this can be a regular occurrence.

Don’t bet the farm on any one trade and try to use more than one indicator or signal to come to your conclusion. However, RSI is a great place to start if you know nothing about crypto trading signals as it’s very easy to get started.

RSI indicator divergence

A divergence occurs when the price of an asset moves in the opposite direction of a major indicator, like RSI. It’s possible to make some big gains on these events if you’re quick enough to catch them before they even out.

RSI advantages and disadvantages

Real market conditions might not be in sync with what the RSI tells you, and this could be pretty dangerous in some cases. RSI can only tell you what’s going on based on what has already happened.

It’s perfectly possible for an asset to look overbought but then continue to rise in price thanks to this. However, the RSI does provide a great look when you’re trading cryptocurrency under normal conditions.